Internet sweepstakes can be an effective and economical way to generate interest in a company's products or services. In particular, a well-marketed online sweepstakes promotion may help drive more customers to a company's website, build buzz around a new product launch and provide a useful tool for collecting information about existing and potential customers. In light of the higher costs associated with conducting sweepstakes through direct mail, broadcast or print media, more and more businesses are turning to the Internet as a cost-effective marketing tool. As a result, the number of sweepstakes that are being promoted using commercial websites has dramatically increased.

Sweepstakes, lottery or contest?

When structuring a sweepstakes, in-house counsel must carefully draft sweepstakes rules and statutorily mandated disclosures to avoid having the sweepstakes characterized as a private lottery, which is illegal in every state. Defined simply, a sweepstakes is a marketing promotion that awards a prize—either monetary or nonmonetary—to a participant on the basis of chance. A lottery, on the other hand, requires chance and a prize, along with "consideration," which in-house counsel must be careful to avoid. Ultimately, the only difference between a legal sweepstakes and an illegal lottery may rest on the absence or presence of consideration.

While the legal definition of consideration can vary from state to state, consideration in this context generally requires entrants to pay a fee or purchase a product to participate in the promotion. In addition, state courts have found consideration to be present in certain nonmonetary expenditures, such as requiring a consumer to visit a brick-and-mortar store or to fill out a cumbersome marketing questionnaire.

There has also been some concern that requiring computer or Internet access to enter a sweepstakes could be deemed consideration. However, as long as consumers are not specifically induced to purchase Internet access and/or a computer for the purpose of participating in a promotion, it seems unlikely that a court would find Internet sweepstakes to be an illegal lottery on that basis alone.

A third category of marketing promotion, known as a contest, does not qualify as either a lottery or a sweepstakes because the winner is selected on the basis of a demonstration of skill, ability, knowledge, creativity, judgment or expertise. Examples of contests include photography, writing, athletics, cooking and video games. Entrants in a contest must be evaluated under objective, predetermined criteria by one or more judges who are qualified to apply such criteria.

Rules of the winding road

While all sweepstakes are subject to Federal Trade Commission regulations, it is important to consider other state laws as well, in particular those that regulate false and deceptive advertising. Because Internet sweepstakes are essentially borderless, they must comply with the relevant laws in all 50 states and, unless the promotion is limited toU.S.residents, international laws. Certain states have gone to great lengths to regulate sweepstakes. For example, underColorado's sweepstakes law, the “No purchase necessary” disclosure (which is required by most sweepstakes laws) must be in “at least ten-point, bold-faced” type.

In addition, a number of states have recently enacted legislation specifically directed at online sweepstakes, or have amended their existing sweepstakes legislation, indicating that scrutiny and enforcement of sweepstakes by states' attorneys general may be on the rise. As recently as March, the North Carolina Court of Appeals ruled that the 2010 North Carolina law that had made online sweepstakes games illegal is unconstitutional. It has been reported that the North Carolina Attorney General's Office plans to appeal the 2-1 decision to the North Carolina Supreme Court, so counsel for companies contemplating national sweepstakes should pay attention to this case.

Furthermore, Internet sweepstakes that permit children younger than 13 to enter must comply with the Children's Online Privacy Protection Act. Depending on the structure of the sweepstakes, the types of media used to promote and implement the program and the types of products or prizes involved, the consumer protection and disclosure requirements mandated by the federal Deceptive Mail Prevention and Enforcement Act, as well as some additional Food and Drug Administration, Internal Revenue Service, Bureau of Alcohol, Tobacco, Firearms and Explosives and other regulations, may apply.

It is a fundamental requirement that companies must make the official rules, as well as certain disclosures for promoting an Internet sweepstakes, available to all potential entrants. Generally, the rules must disclose the method of entry, eligibility, method of determining a winner, odds of winning, the beginning and ending dates of the sweepstakes and where a list of winners may be obtained. The rules also have to include the sponsor's name and address.

Counsel should also be aware that Florida, New York and Rhode Island currently each require sweepstakes sponsors to register with the state if the total retail value of all the prizes exceeds a statutorily specified dollar threshold. Florida and New York also currently require sponsors to post a bond in an amount equal to the total value of the offered prizes as part of the registration and to submit a list of the winners to the appropriate agency. Compliance with such laws will require sponsors to maintain and enforce an appropriate document retention program.

The bottom line is that in-house counsel should consider all state legislation and case law before carefully drafting the official rules defining a sweepstakes to avoid a potential argument that the promotion requires illegal consideration or runs afoul of the ever-changing body of regulations in this area.